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Nabors Looking to 3Q and Beyond for Recovery

Following a second quarter that saw performance declines across its businesses, drilling and oil field services, Nabors Industries Ltd., is ready for the economy and the industry to turn around. When will that be? The third quarter could put a floor under declines and mark the beginning of a recovery, CEO Gene Isenberg said, but he's not particularly bullish.

"I believe that the third quarter will likely represent a bottom in all of our operations, although it remains difficult to predict the timing and pace of the eventual upturn in natural gas-driven activity," Isenberg said. "Regardless, Nabors will fare relatively well throughout this cycle given the extent of long-term contracts in our U.S. land drilling unit, the ongoing strength of our international operations and our other more oil-dependent businesses."

During a conference call with financial analysts last Wednesday Isenberg expressed a reluctance to spend in anticipation of recovery as the company might have done during past downturns.

"As we all know, this is a poor market, and as we all know -- even though not everybody's going to admit it -- none of us knows exactly when it will end," Isenberg said. "My own guess, for what it's worth, is that we will see the bottom in the third quarter of this year, although I am certainly not looking for a V-shaped rebound.

"...[T]his downturn is so dramatic we're not saying we need to be prepared for the upturn by spending money now..."

Excluding noncash items, Nabors posted adjusted income of $143.9 million for the second quarter compared to $265.1 million in the second quarter of last year and $274.1 million in the first quarter of this year. Net income excluding noncash items was $90.9 million, or 32 cents/share for the second quarter compared to $176.4 million, or 60 cents/share, in the second quarter of last year and $184.4 million before ceiling test adjustments, or 65 cents/share, in the first quarter of this year. Operating revenues and earnings from unconsolidated affiliates totaled $868 million in the second quarter compared to $1.28 billion in the second quarter of last year and $1.21 billion in the first quarter of this year.

"The quarter's results reflect the well known declines in activity among our North American gas-centric businesses since late fourth quarter combined with less robust international results, particularly in Latin America," said Isenberg. "Virtually all of our units experienced both sequential and year-over-year declines in quarterly operating income, but we believe most have stabilized with the exception of our U.S. Lower 48 land drilling operations.

"In our U.S. Lower 48 land drilling operations we believe the working rig count has reached stability, although third quarter operating income is expected to drop by as much as an additional 50%. We expect results to be stable thereafter as the deployment of 16 previously contracted newly-built rigs over the next four quarters will largely offset the downward pressure exerted by rigs rolling over to spot market rates and expiring contracts for rigs that are generating monthly income but are not working. During the quarter we averaged 103.4 rigs working and another 39.6 rigs generating income but not working, including 13.6 lump sum settlements, for a total of 143 rig years."

The CEO said the company has "cut the hell out of capex [capital expenditures], and it's going to be further cut next year." Staff cuts and salary reductions have been the most painful, he said, noting that higher-paid employees took the biggest hits.

"Further reductions in capital spending and operating costs will benefit 2010 cash flow and comfortably assure us of more than adequate liquidity to repay the debt due this year and in May of 2011," he said.

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